Background: This manuscript describes a method for adjustment of nursing home quality indicators (QIs) defined using the Center for Medicaid & Medicare Services (CMS) nursing home resident assessment system, the Minimum Data Set (MDS). QIs are intended to characterize quality of care delivered in a facility. Threats to the validity of the measurement of presumed quality of care include baseline resident health and functional status, pattern of comorbidities, and facility case mix. The goal of obtaining a valid facility-level estimate of true quality of care should include adjustment for resident- and facility-level sources of variability. Methods: We present a practical and efficient method to achieve risk adjustment using restriction and indirect and direct standardization. We present information on validity by comparing QIs estimated with the new algorithm to one currently used by CMS. Results: More than half of the new QIs achieved a "Moderate" validation level. Conclusions: Given the comprehensive approach and the positive findings to date, research using the new quality indicators is warranted to provide further evidence of their validity and utility and to encourage their use in quality improvement activities.